No. 2015-04
12 August 2015
FASB issues ASU No. 2015-13, Derivatives and Hedging
(Topic 815): Application of the Normal Purchases and
Normal Sales Scope Exception to Certain Electricity
Contracts within Nodal Energy Markets
Background
On 10 August 2015, the FASB issued ASU No. 2015-13, Derivatives and Hedging
(Topic 815): Application of the Normal Purchases and Normal Sales Scope Exception to
Certain Electricity Contracts within Nodal Energy Markets, a consensus of the FASB
Emerging Issues Task Force. The update is intended to resolve the diversity in
practice resulting from determining whether certain contracts qualify for the normal
purchases and normal sales (NPNS) scope exception under ASC Topic 815,
Derivatives and Hedging.
Contracts that provide
for the purchase or sale
of something other than
a financial instrument or
derivative instrument
that will be delivered in
quantities expected to be
used or sold by a
reporting entity over a
reasonable period in the
normal course of
business are considered
NPNS
The amendments apply to entities that enter into contracts for the purchase or sale
of electricity on a forward basis and arrange for transmission through, or delivery to
a location within, a nodal energy market where one of the contracting parties incurs
charges (or credits) for the transmission of that electricity based in part on locational
marginal pricing (LMP) differences payable to (or receivable from) an independent
system operator.
What’s new?
Current GAAP does not contain specific guidance regarding contracts that use
LMP by an independent system operator. As a result, there is diversity in practice
with the accounting treatment for these types of contracts. Some interpret these
contracts as having met the physical delivery criterion of the NPNS scope exception
as the substance of those contracts requires the physical delivery of electricity.
Others believe that use of LMP by an independent system operator results in a net
settlement of a contract, therefore not qualifying as NPNS.
The ASU clarifies existing guidance to specify that the use of LMP by an
independent system operator does not constitute net settlement of a contract for the
purchase or sale of electricity on a forward basis that necessitates transmission
through, or delivery to a location within, a nodal energy market. This also includes
circumstances in which legal title to the associated electricity is conveyed to the
independent system operator during transmission. As such, contracts that use LMP
by the independent system operator meet the physical delivery criterion of the
NPNS scope exception and if the physical delivery criterion along with all of the
other criteria under the NPNS scope exception are met, entities may elect to identify
a contract as NPNS.
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Effective dates and applications
The updates are effective upon issuance of the ASU for all entities and should be
applied prospectively. Entities will have the ability to designate on or after the
date of issuance any qualifying contracts as NPNS.
Our thoughts
The guidance set forth within ASU 2015-13 for the eligibility of certain electricity
contracts for the normal purchases and normal sales scope exception will resolve
the diversity in practice resulting from differing views on accounting for certain
contracts. In addition, entities that decide to designate certain contracts for the
sale of electricity on a forward basis that necessitate transmission through, or
delivery to a location within, a nodal energy market as NPNS may be able to
realize a reduction in costs that may have been previously incurred for
remeasuring contracts at fair value.
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